Tuesday, November 23, 2010

Giving your own way: Doing charity right

Charity can get complicated. There is no “wrong” way of giving, but you can certainly maximize your gift in a number of ways.

We all give in our own way. A neighbor recently invited us to help at a homeless shelter. That was his way of giving back.

Service tends to be the best gift because it’s a direct contribution and you can often feel the results. I still can’t express enough gratitude for the meals my neighbors prepared when my wife was ailing last year.

What if you simply want to target a handful of charities to maximize your donations this year? There are thousands of organizations in ever greater need; contributions to the 400 biggest groups dropped 11 percent last year.

Aid to those in poverty is also welcome and addresses a growing need. According to the Census Bureau, some 44 million people in the U.S. fell below the poverty line last year, up from 40 million in 2008.

There is another way of helping that is focused on charitable efficiency. I know this is a strange word to use in altruism, yet it refers to how much of your dollars actually reach the “mission” of the charity.

Like for-profit corporations, non-profits can grossly overpay their executives and waste money.

Some charities burn up a lot of money paying for expensive promotions and events. The more-efficient groups employ more than 80% of their income on programs that actually help people in need.

One of the first places to look when vetting a charity is its Form 990. This will show you how much the group is spending on expenses relative to income. Although it will give you some idea of its efficiency (ratio of income to program spending), you might be better served by using a service like Charity Navigator, which rates thousands of charities. Guidestar is another reliable source.

If you’re concerned about a tax deduction, you’ll need to ask a different set of questions, such as:

* Is the charity registered with the IRS as a 501(c) 3 or 501 (c) 4 group? The IRS permits a deduction for the former but not the latter, which may do lobbying.

* Do you itemize? If you don’t list specific donations on Schedule A on your federal tax form, you can’t claim write-offs, which are limited to from 30 percent to 50 percent of your adjusted gross income. See IRS Publication 526 for a list of what you can deduct.

* Be careful with benefit events. You can only deduct the amount exceeding the fair market value. So if you attended a charity dinner for $250 and the dinner was worth $50, you can only deduct $200. You can’t claim a deduction for your services or for political contributions.

* Stock and other financial gifts are deductible at fair market value. This can get complicated, though, especially if this is involved with estate planning. As with other tax matters, contact your tax planner or lawyer.

You can also be quite creative in the way you give. You could combine service with direct cash gifts. I’ve seen many volunteers who work regular hours with a charity or hospital and provide donations through their estate plan.

Speaking of estate planning, you can contribute before you die through regular ongoing gift programs, set up annuities or charitable remainder trusts, which trigger a larger gift when you pass.

Flummoxed about deciding which cause is worth your contribution? You can delegate your money and decision making to a donor-advised fund, which leaves the donations up to professional managers. These entities are run by nearly every large mutual fund organization such as Fidelity Investments, T. Rowe Price and the Vanguard Group.

Whatever option you choose, keep in mind that charitable planning is a cautious art and shouldn’t be done on impulse. Thousands of charities spend too much on telemarketing (avoid those that do) and too little on the people they are supposed to help. By being careful and doing research, you can aid a lot more people.

Photo: A girl makes a cash donation to the United States fund for UNICEF in Philadelphia, Pennsylvania, January 15, 2010. REUTERS/Tim Shaffer

Thursday, November 18, 2010

How to sail the QE2 investment cruise

If only “QE2″ stood for the famous cruise ship Queen Elizabeth II. When she was sailing (she was retired in 2008), you could plunk down a tidy sum, be guaranteed a handful of exotic locales and come back home safely.

Cruising is probably not the appropriate metaphor for the acronym for the U.S. Federal Reserve’s recent QE2 or “quantitative easing,” which will buy at least $600 billion in long-term U.S. Treasury Bonds. It’s an investment voyage of sorts and could be profitable if you concentrate on overseas ports of call.

The Fed hopes that by bringing down interest rates — and indirectly printing money — that the lower costs of doing business will compel U.S.-based businesses to hire workers and stimulate the doldrums-like economy.

I don’t believe that will happen in a significant way, although if I’m a chief financial officer, I will relish the fact that I can sell more long-term debt at low rates. It certainly will help the bottom line of thousands of corporations. As an individual investor, though, I see QE2 as a way of pounding down the value of the dollar relative to other currencies. That may boost the U.S. export economy somewhat, but not if other countries do the same thing or on a bigger scale. (Hello, China).

Nevertheless, investors who hold stocks or bonds from non-U.S. countries can benefit from the relative drop in dollar valuations. Combined with overseas economic growth, this is a trend worth investing in long term as it may take years before Uncle Sam gets on his feet again.

As Standard & Poor’s strategist Alec Young observed in a recent report, “international equities are huge beneficiaries of QE2-induced cross-market trends…a falling greenback boosts dollar-denominated overseas equity returns.” While it’s too soon to tell if this is a long-term trend, the market has embraced the idea of a cheaper buck. The S&P 500 stock index surged 2.5 percent on November 4 in anticipation of QE2.

Are we watching a genuine rally or just short-term optimism that will be dashed by growth that doesn’t materialize in the U.S.? Many economists are saying that if the Fed’s move backfires, it could fuel an inflationary surge, so keep your eye on increases in the producer price index. Commodity prices have been soaring of late, although much of the run-up is attributed to demand in emerging economies.

In the interim, you need to ask yourself if you have enough exposure to non-U.S. equities and bonds. Financial planners generally advise that non-retirees keep up to 40 percent of their portfolio in international shares.

And don’t neglect domestic companies that have large non-US operations or are major exporters like Caterpillar, Intel and Archer Daniels Midland. They will clearly benefit from the dollar decline. (These are not recommendations, only examples).

Even better vehicles than single stocks are mutual funds or exchange-traded funds. They offer low-cost ways of investing in hundreds of stocks and bonds. This is the pick of the litter:

iShares Emerging Market Index ETF (EEM). The fund invests in the top companies in developing countries.

iShares S&P/Citigroup International Treasury Bond Fund (IGOV). A good way to sample bond yields from across the world.

As we watch what QE2 does to the U.S. economy, just keep in mind one thing: This is one of the last arrows in the Fed’s quiver. The Fed may not even hit its target or put a dent in unemployment. If the U.S. economy continues to slide, look for more rough waters ahead.

Photo: The Queen Elizabeth 2 reaches the end of her journey as she arrives in Dubai November 26, 2008. REUTERS/Jumana El Heloueh

Tuesday, November 16, 2010

The Federal Reserve can buy all the US Treasury bonds it wants, but it won’t do much other than make corporate treasurers waggily over being able to borrow at incredibly low rates.

As a last-ditch effort to stimulate the US economy, the Fed’s $600 billion initial purchase of US debt, also known as “QE2,” could be better spent directly helping Americans and easing the housing crisis.

Part of the problem is not that interest rates aren’t low enough — short-term rates are practically zero — it’s that there’s little demand because nobody is getting financially ahead through employment, homeownership or 401(k)s. There’s no sense in the middle class of a “wealth effect.” Fear is ruling now. So here are some proven approaches that might help:

A Payroll Tax Holiday. The Fed could boost employment by redirecting its QE2 purchases to offset a payroll tax holiday. This would directly put money in both employers’ and employees’ pockets. It might even stimulate some hiring.

A Really Potent Housing Credit. What would happen if the Fed intervened in the housing market in a meaningful way instead of buying distressed mortgage securities and Treasury debt? It could redirect money (with Congressional blessing and IRS oversight) into paying for homebuyer tax credits.

The last round of $12.6 billion in buyer’s credits ($8,000 for newbies and $6,500 for others) proved to be somewhat successful; 1.8 million people bought homes. Why not even add a sweetener of an additional $1,000 rebate to those who buy vacant, short sale, bank-owned or foreclosed homes? And instead of offering it for a few months, offer it for two years, or at least until the inventory of some 19 million empty homes is whittle down to about 1 million homes or less.

A Retirement Funding Boost. Let’s overhaul the fabled 401(k), the retirement plan that was never meant to be a mainstay of long-term savings. Some 40% of Americans don’t even have access to them at work, with minorities, young people and low-income workers showing the lowest participation rates, according to Demos, a New York-based policy center. Why not make a tax-free contribution to all Americans in a no-fee, universal savings account? Savers would face a tax penalty if they withdrew the money before retirement age, but could still use the assets to borrow against in a pinch.

Since the Fed is now a super-regulator in the wake of financial reform, why doesn’t it impose limits on 401(k) fees, which costs workers an average 20 percent of their retirement kitty over a working life? They could mandate that program expenses can’t exceed those of the federal government’s Thrift Savings Plan. This is probably more of a mission for Congress, though, which has avoided addressing this massive rip-off for years.

Direct Help to States. It’s no secret that a combination of the Great Recession and housing crisis have knocked the stuffing out of state, local and school board revenues. Inflation-adjusted state tax revenue fell nearly 15 percent during the downturn, which was the biggest decline in 50 years, according to the Lincoln Institute of Land Policy. Teachers are being laid off or furloughed and the overall quality of education in the US is suffering.

If the Fed wants to create — or at least preserve employment — it can direct money to the states. I know this is not what the Fed normally does as baron of the banking system, but at least it can make funds available for borrowing to state treasuries through member banks at zero interest. That’s the minimum it can do. Look at the myriad toxic securities-buying programs it set up for Wall Street in 2008!

I realize that many of these suggestions are beyond the Fed’s purview as it’s not in the fiscal stimulus business per se. Yet as a divided Congress begins to organize and study ways of reviving the economy, further enabling the federal government’s debt addiction will do little to find buyers for vacant homes or convince businesses to start hiring.

Without consumers flush with money and gainfully employed, the private sector won’t budge. Lowering long-term interest rates won’t hurt, but it won’t compel banks to lend money in a low-demand environment. It’s like a crazed dog chasing its tail. The Fed still has an awful lot of sticks to throw — if it can only send them in the right direction.

Monday, November 8, 2010

5 profitable post-election predictions

Remember that classic carnival ride, the “tilt-a-whirl?” That’s what financial planning will be like under the new Congress, when Republicans control the House of Representatives and the Senate is divided.

The wrenching move to the right and the political wrangling about these key topics could be dizzying. That means you can either get motion sickness watching the two parties battle, or you can try to plan for your long-term goals no matter what comes out of Washington.

The most important legislation that didn’t get passed — or even seriously discussed — had to do with tax rates. The estate tax expired at the end of last year. So if someone you knew expired this year, then maybe you and other heirs get a free pass. (Congress could still pass a retroactive tax, though).

Income-tax brackets are also still in limbo. The Bush-era tax rates ranged from 10 percent to 35 percent; they previously ranged from 15 percent to 39.6 percent. Come 2011, if Congress does nothing, the higher rates will automatically return. And low 15 percent rates on dividends and capital gains will also rise. That brings me to my first prediction:

The Bush-era tax rates will remain. I don’t think either party will mess with them on the eve of a presidential election year. The sluggish economy is also a linchpin. There might be some compromise on when the higher rates will kick back in — maybe two or three years from now — if Congress can even reach an agreement on that. For now, though, I would say it’s not likely you will be hit with higher income taxes next year.

The estate tax will return with higher exemptions. Even mega-investor Warren Buffett agrees that some estate tax is necessary. While I don’t think we’ll see a return to the pre-Bush top rate of 55 percent on estates valued at more than $1 million, we’ll see some compromise on how much of an estate will be exempted from the tax. My guess is that Congress will use a proposal crafted by Senators Blanche Lincoln (D-Ark.) and Jon Kyl (R.-Arizona) as a starting point. They suggested a $5 million exemption and 35 percent rate, which is the top marginal income tax rate now. Look for the GOP-dominated House to go for an even higher exemption: $10 million wouldn’t surprise me.

Deficit cutting will eventually impact entitlements. This is a roundabout way of saying the House will begin the painful discussion of how to sustainably fund Social Security and Medicare. On the House side, I would expect to see a revival of personal savings accounts, which were floated during the Bush years, which would be carved out of Social Security contributions.

Medicare, which may run out of money in 18 years, has gotten some breathing room from health care reform, although tax increases or benefit cuts may still be on the table. Some GOP and Tea Party members have also said repealing health reform is at the top of their agenda, so this is a wild card. I don’t think any serious action will take place in 2011 on any of these programs. No matter what happens, fund your Roth IRA or 401(k). Somewhere down the road, a tax increase will eat up more of your retirement funds. Having tax-free income (you pay taxes only on the contributions in Roth funds) will be a big plus.

Retirement savings may be bolstered. There have been “Auto IRA” proposals in various House and Senate committees for years to bolster retirement savings at small businesses that both parties have supported. Yet these programs have never reached the floor of either chamber. They might make it through next year.

Stocks will be a smart investment. Neither party will have any impact on the business cycle. Corporations have trillions sitting in their treasuries; the more mature companies are still paying healthy dividends that beat most pathetic money-market fund yields. It doesn’t make sense to sit on the sidelines waiting for something dramatic to happen. Invest in stocks through an index fund such as the Vanguard Total World Stock exchange-traded fund.

The only thing I can guarantee is that the coming Congressional conflicts won’t be dull. You’ll see all sorts of fur fly over tax rates and paring the federal budget deficit. Just make sure that you’re positioned to take advantage of any economic rebound. That’s one thing that everyone wants to be optimistic about.

Wednesday, November 3, 2010

In ETF war, investors finally win

Imagine a financial services war in which prices dropped and benefited both investors and providers.

Such a conflict is waging in the exchange-traded fund (ETF) arena, where commission and fund management fees (”expense ratios”) are both coming down. This is exciting for cost-conscious investors because it can boost your total return with only a handful of funds.

Because you are paying less upfront (no sales charges) and annually (management expense ratios), your net return can be higher.

Leading discount brokers such as Schwab and TD Ameritrade have slashed their commissions on some popular ETFs to zero. Fund managers like Fidelity and Vanguard have also zeroed out commissions for select ETFs through their brokerage platforms.

ETFs are useful tools that most mainstream investors probably don’t know about or understand. They are pools of securities like mutual funds, only they trade on exchanges. Repriced constantly when the market is open, you can only buy them through brokers. Most ETFs are passive index portfolios, so they can keep costs low — much lower than actively managed mutual funds.

Not only are you getting to buy an elite group of ETFs without paying a brokerage fee — only if you buy through the above-mentioned brokers — you’re getting passive broad-basket ETFs at rock-bottom management expenses.

Let’s say you want to buy a global stock fund to get a sampling of stocks across the world. If you went through a full-service broker like UBS, the Swiss bank and brokerage, they might pitch you their Global Allocation A fund (BNGLX). For the privilege of investing in this fund, they’d charge you a stiff 5.5% upfront sales charge plus 1.22% annually in management expenses.

Suppose you wanted to buy a global stock index fund on your own. You could buy the iShares MSCI (ACWI) Index ETF through Fidelity’s online brokerage commission free and pay 0.35% annually. So not only do you get a worldwide stock portfolio, you’re saving three and half times the annual expenses over the UBS fund and the commission.

Picking the right no-commission ETF can get confusing, though. Do you just pick the cheapest funds? The ones with the greatest diversification? Yes and Yes.

It’s fairly simple to construct a core portfolio that will give you most of the world’s stock and bond markets. This is the kind of portfolio you buy and hold. To determine how much you should hold in stocks, it should roughly match your age. The older you get, the less stocks you should own. Disclosure: I own ETFs and mutual funds from Vanguard, iShares and Fidelity in my 401(k)s.

You want your core portfolio to protect against inflation, provide some growth and income. Here’s a low-cost, boiled-down portfolio that gives you a piece of most assets:

Bear in mind that not all ETFs are commission-free, nor are they worth considering.

The commission war has not touched the entire $1 trillion universe of ETFs — and that’s a good thing. If you want to actively trade ETFs, you should pay more, if for no other reason than to discourage you from market timing and attempting to pick hot sectors at the wrong time.

Fortunately, unlike the real-world shooting wars, the ETF battle will be a win-win situation for those who need to save more for retirement and other goals.

About Me

I am a writer, journalist, speaker, teacher, poet and musician. For information on my latest books see www.audacityofhelp.net and www.culdesacsyndrome.com.
I am a seeker of truth. I've written 13 books (see www.johnwasik.com) and countless articles in magazines and newspapers across the world. Basically I believe in an ecocentric philosophy. All that we do is tied into the flow of the earth and cosmos. We strive to find a new prosperity that is in harmony with our personal ecology. Along those lines, economics, politics, social issues and our lifestyles should be best conducted to be kind to others and in a sustainable manner.